Stop Foreclosure-How to Avoid Foreclosing on Your Home

Hundreds of thousands of Americans are facing the prospect of foreclosure on their home right now. Foreclosure rates are running higher than at any time in the last twenty years. A combination of over borrowing, low lending standards and a drop in property values is exacerbating the situation. President Bush himself addressed the nation recently with a series of measures designed to help the situation.

Regardless of the amount of other people facing the same problem, when the specter of losing your home looms it is difficult to deal with the problem head on. But that is what’s needed. You must face the situation, weight the options and make a decision. For some, it may already be too late, but this guide is written with the intention of clearly explaining the options available to avoid foreclosure. Foreclosure is not unavoidable and depending on where you are in the process will determine the steps you need to take to avoid foreclosing on your home.

For the purposes of this article, we will define the term “foreclosure,” as being the legal act of a bank, lender or secured creditor repossessing or forcing the sale of a piece of real estate or a home secured by a lien or mortgage after the borrower’s failure to comply with the terms of the loan in some way. Usually, this would mean defaulting on one or more due mortgage payments. Put more simply, failing to make a succession of mortgage payments as per the agreed schedule could result in the bank “foreclosing,” on the loan and taking the property in lieu of payment.

Foreclosure by Judicial sale

This is the most common type of foreclosure and means that the sale is done under the auspices and control of a judicial body – a court and a Sheriff's or Marshal's office. Proceeds realized from the sale go first to the administrators to cover the costs of the sale, next the mortgage holder, thirdly any other lien holders and lastly, the mortgagor or borrower. It is important that the mortgage holder has correctly notified all parties, so that a purchaser obtains clear title to the property after the sale.

Foreclosure by power of sale

This involves the forced sale of the property by the mortgage holder without the supervision of a court. Generally, this is a faster method than foreclosure by Judicial sale. Once again, in order of preference are the administration cost, the mortgagee, other lien holders and finally the borrower.

There are other types of foreclosure still available in certain states, such as “strict foreclosure,” but these are the two main types.

1. Speak to your lender. Notify your bank or lending institution as soon as you are aware you have a problem. Do not wait until you are months behind with payments. Despite most people’s low opinion of banks(mine included) it is not in their best interests to foreclose on a loan. It often costs them a good proportion of the loan to do so and they may be prepared to reduce the pressure by:

• Lowering your interest rate
• Lowering your monthly payments
• Extending the loan terms
• Offer a repayment agreement for already missed payments

This should always be your first course of action. Do not wait until proceedings have begun before speaking to your bank. Even if you are already behind with payments, it is never too late to talk to the bank. With the current number of foreclosures, they may already have a rescue package organized.

2. Refinance. Another option is to refinance the loan from another source, i.e. borrow money from someone else to pay the loan off and start with a new repayment schedule. Unfortunately, if you are already in the position of being badly in arrears with one mortgage provider or on the edge of being foreclosed upon, it is unlikely another lender will be able or willing to offer you financing. Ignore all the “guaranteed to get you out of debt,” and "guaranteed to stop foreclosure," advertisements. If you are already facing financial difficulties, borrowing more money at a higher rate of interest is not going to help. Never ever sign a piece of paper from a company guaranteeing to stop foreclosure – they may well be getting you to sign over the rights to your home. Seek independent legal advice or free advice from an HUD Approved Housing Counseling Agency first. Getting out of debt is like losing weight – the only way to do it is to spend less than you earn.

3. Sell the house. It may be that your mortgage provider will give you a certain amount of time in which to sell the house. This is certainly preferable to a forced foreclosure sale. Particularly if you have reasonable equity in the property. Doing this may well save you considerable legal and administrative costs that will have to come out of the proceeds of the sale if done through a foreclosure sale. Just remember, in a foreclosure situation – you are the last on the list to receive any money. Selling your house and moving to a cheaper house may not seem an appealing option, but it certainly is better than having your house foreclosed, your credit rating damaged and then not being able to raise another mortgage on a different property. It is possible to take this step at almost any stage of the foreclosure process.

4. Short Sale. Banks like foreclosure no more than you do. If you are holding an “upside down mortgage,” or have “negative equity,” that is, the amount you owe is greater than the value of the house you may be able to persuade the bank to absorb the difference. This is called a short sale. It may well be that the cost to the bank in a short sale will be less than the foreclosure costs. Not all lenders will agree to this type of sale but it is certainly worth finding out. Typically, you must meet the following criteria:

• Your loan must be in arrears by at least two months
• Your house must be worth at least 63% of the mortgage you owe and be able to be sold for at least 82% of the appraised value in it’s current condition
• The house must be sold within 3 to 5 months
• You must persuade the bank to assume the costs of the short sale. i.e. once the house is sold - even if it sells for less than your debt – any amount outstanding is written off and you are free and clear. The costs include any commissions, taxes, closing costs title fees, and the balance of any outstanding loans including interest charges and any late fees.

It is important to get independent legal advice when entering into this type of sale. Once the house is sold, you must be free of all debt. This is certainly an option worth pursuing if you are in an upside-down mortgage situation.

In the case of a Short Sale - any amount written off during the process can be considered by the IRS to be a "gift" or "forgiveness of debt," and will most likely be viewed as taxable income and be taxed accordingly. It is important to get this amount verified and taken into consideration. This varies by situation and State.

Generally, the best way to approach a short sale situation is to already have an offer from a qualified buyer - in writing.

Update - With the introduction of the Mortgage Forgiveness Debt Relief Act - This will no longer be the case.

One exception to the refinancing rule is the new FHASecure plan announced recently by President Bush. It is designed to help a limited number of people out of their current situation. Be warned though, despite touting this as the saviour of the nation, this is more about saving the banks than you and there is a price to pay. The higher risk you are, the higher interest you will pay. The government and lenders are being very coy about the actual interest rate that you will have to pay and the information on the website reads very, very easy, until you find the information about interest rates when you are bombarded with a barrage of difficult-to-understand rhetoric and a meaningless list of federal interest rates for the last twenty years. On the front page of the HUD website, there is not even a link to the information which tells me you will be paying dearly if you have a low credit score. As far as I can tell, the base interest rate will be 6.5%

Another charge on top of this is a 1.5% insurance premium payable up front which can be added to the loan and a 0.5% per annum premium. On a $100,000 loan over 30 years, this equates to over $18,000 – just for the insurance. It is certainly worth comparing rates with this loan against other loans. The one major advantage of this type of loan is the relatively low down payment – only 3% - other lenders may require more.

Generally, to qualify for an FHASecure mortgage, you must be able to satisfy the following requirements:

• Have a valid Social Security Number (SSN)
• Be legal resident of the United States
• Be of a legal age to sign on a mortgage in your state
• Demonstrate your ability to meet repayments
• Be able to show that you made regular payments on your mortgage before any recent rate changes and any missed payments have come after the increase

Realistically, this is an absolutely last resort that will cost an extremely high price.

It is possible to avoid foreclosure and these are the basic steps to take regardless of how far along you are in the process.

• Talk to your lender
• Explore all options including refinancing, either with a conventional loan or FHASecure loan
• Sell the house yourself if you feel you cannot make the mortgage payments
• Take independent legal advice
• Explore the short sale alternative if you have negative equity

At any time during the process it is vital to talk to the other parties involved. Do not ignore letters from either the court or the bank - they may well contain time sensitive documents the need to be dealt with to keep your rights safe.

The other side of the coin is the amount of foreclosure opportunities presented to real estate investors. The glut of houses on the market offers the cash buyer many alternatives and perhaps bargains. Even in the luxury real estate market.

There are now a large number of companies involved in buying and selling foreclosed homes.